Lawyer’s Corner: Condition of Property at Possession

Lubos K. Pesta, Q.C., has written another informative article regarding an issue surrounding closing: the condition of the property.

Condition of Property at Possession

One of the most common and frustrating issues for both real estate industry members and lawyers in closing residential real estate transactions is a dispute over the condition of the property on Completion Day. Rarely are buyers entirely happy with the condition and cleanliness of the property when they take possession. While occasionally their concerns are valid, in most cases they are not. In any event, there is not much that lawyers can do to assist buyers in this regard. This column will explain why the Purchase Contract is worded the way it is and what buyers’ representatives can do to protect their clients where specific concerns are identified when writing up the offer.

The condition of the property is addressed in clause 4.2 of the Residential Real Estate Purchase Contract (the “Contract”) as follows;

“When the Buyer obtains possession, the Property will be in substantially the same condition as it was in when this Contract was accepted.”

In addition, clauses 6.1(b) and 6.2 of the Contract require that when possession is granted, all included Attached Goods (fixtures) and Unattached Goods (chattels) be “in normal working order”.

So what does this really mean?

In general, and unless additional terms are inserted in clause 7.6 of the Contract, it means that with the exception of appliances (which have to work), the seller doesn’t have to clean up or repair the property in any way for the buyer. In fact, the words “substantially same condition” imply that some deterioration resulting from normal wear and tear, and the scrapes and blemishes resulting from the moving out process, are acceptable. The seller is certainly not required to paint walls, clean carpets or fix small holes in walls where pictures have been removed.

Even if, contrary to the terms of the Contract, an appliance doesn’t work or more significant damage (such as a broken window) constituting a breach of the “substantially the same condition” obligation is discovered on possession day, the buyer’s lawyer may not be able to refuse to close or otherwise secure compensation for the buyer. In general, the buyer is only entitled to refuse to close if the damage to the property is so major that it would constitute a “material” breach of the agreement. In this case, it is important that the buyer or the buyer’s representative bring these issues to the attention of the buyer’s lawyer quickly. The buyer’s lawyer will communicate the matter to the seller’s lawyer, which will result in one of two possible outcomes:

The seller’s lawyer may be able to convince the seller to offer some compensation to the buyer, repair the problem or agree to a monetary holdback until the problem is resolved; or

The seller will refuse to take responsibility for the problem, but at least it will be documented that the problem existed at the time of possession which will help the buyers if they choose to prosecute a small claims action for recovery of damages.

Because the problem of not being able to force the issue when the condition of the property is not “substantially the same”, industry members sometimes suggest that a default holdback provision be incorporated in the standard Contract to routinely allow buyers to withhold a predetermined sum (such as $1,000 for example) until the condition of the property is found to be satisfactory. This is not, unfortunately, possible on a practical level. The inevitable result of this provision would be that, rightly or wrongly, buyers would take advantage of the holdback entitlement in almost all cases. Sellers would then have to accept the loss or be forced to sue buyers to receive their full sale proceeds.

Building an early walkthrough or condition inspection provision into the contract is also not a practical solution to the problem. Since damage to the property is only likely to occur when the seller is moving out or only apparent after the furniture is removed from the premises, a walkthrough conducted prior to the seller’s move is virtually useless. It should be mentioned that unless it is specifically written into the Contract, the buyer is not entitled to insist on access to the property in the period between the removal of conditions and possession day.

Although the current Contract could, as a result, appear to be biased in favour of sellers receiving their money from the sale, I always point out to unhappy buyers that the same Contract will protect them for their sale proceeds when it comes time to sell their home in the future.

In cases where a buyer wants the seller to carry out a specific task prior to possession, such as the shampooing of carpets, the removal of car parts from the backyard, or a specific repair to the property, the buyer’s representative has to insert specific additional terms into the Contract in clause 7.6. To be effective, such terms should contain: a firm deadline; a monetary holdback provision if the work is to be completed post closing or an inspection provision if the work is to be done prior to closing; and a term setting out the consequences if the work is not carried out as required.

Lubos K. Pesta, Q.C.
Walsh Wilkins Creighton LLP

The comments expressed in this article are for information purposes only and serve to highlight general principles. Each situation is different and you should seek legal counsel before pursuing any particular course of action. These articles do not create a client/lawyer relationship and do not constitute legal advice. The opinions expressed herein are those of the author and not of AREA.

Copyright Alberta Real Estate Association. Reprinted with permission. AREA makes no guarantee as to the accuracy or completeness of this information.

Robert Hogue, senior economist with RBC. Says he of a market like Vancouver: “We fear it’s becoming increasingly disconnected from local demand conditions and vulnerable to a painful correction, especially once interest rates resume their ascent.”

Thanks

–Mike Fotiou says: Yes, it was in the most recent report from RBC. The same report also says that Calgary is “transitioning to a more vigorous phase” and “no bubble” in Alberta. Remember though, when RBC rates affordability in the report it’s based on a 25% downpayment.

TD Economics Senior Vice President and Senior Economist Craig Alexander said that “I think next year we’ll see about an eight per cent decline in sales, and I think we’ll see home prices pulling back by a couple of percentage points. But I do not think that monetary tightening will lead to a significant correction in the marketplace.”

To keep inflation in check here at home, though, Alexander said BoC Governor Mark Carney will have no choice but to raise the bank’s key interest rate.

TD Economics had originally forecasted that the BoC would raise its overnight lending rate by 25 basis points in July, but in light of Carney’s speech on May 16, Alexander said TD has revised its forecast to September. TD Economics expects the bank will raise the rate until it reaches three per cent by mid-2012.

These successive interest rate hikes will depress real estate activity in the latter half of 2011 and through 2012, Alexander said.

He agreed with CREA’s analysis that the federal mortgage rule changes introduced on March 18 contributed to April’s dip in activity. But the latest decline won’t stop here, he said. Once the Bank of Canada (BoC) resumes raising its key interest rate, housing demand will moderate further, he said.

Even though the Canadian economy is, according to the BoC, on track to grow 4.2 per cent this year and inflation rose above three per cent in March, Alexander said the BoC has been reluctant to raise the overnight lending rate because of a number of risks in the global economy, including the slow recovery in the U.S., the sovereign-debt crisis in Europe and rising inflation in emerging markets.

“All of the economic indicators suggest that the Bank of Canada should be raising rates right now, but I think they’re in wait-and-see mode because there are all of these global risks out there,” he said.

Results from the first quarter support the concerns of brokers who point to a growing number of homebuyers having to scale back on expectations. Even with more modest homes, many are finding it harder to win prime-rate financing given mortgage rule changes that have made it harder to qualify for CMHC-backed loans.

“The spring market has been softer, I’d say about 15 percent,” Joe Digiambattista, vice president of Sales for Canadiana Financial told MortgageBrokerNews.ca. “What we’re seeing is a loss of what were A clients that no longer qualify as borrowers with us because of the rule changes. I think those clients have gone to the alternative lender market, where their risk might not be suited to that model.”